Despite the fact that over the past few decades the automobile insurance industry has become much more competitive and the process of getting a quote and obtaining coverage has gotten simpler, the average auto insurance premium rose nearly 3% in the past year, according to AAA.
If there are more auto insurers to choose from, why aren’t costs dropping? The answer could be that the costs associated with paying claims have risen dramatically over the past decade, due to various factors.
The Value of Vehicles and the Cost to Repair Them
The way automobiles are designed and manufactured has become much more sophisticated in the past decade, and much technological advancement has been made. As a result, vehicles come with many more sophisticated features than they used to, cost more to buy, and are more expensive to repair, since the cost of parts and labor rates has also skyrocketed. When a vehicle is more expensive to repair, it becomes more expensive to insure.
Automobile Safety Ratings
Insurance companies collect a large amount of data from customer claims and spend a significant amount of time analyzing industry safety reports to develop vehicle safety ratings and offer discounts to customers who drive safer vehicles. As a result, some companies increase premiums for cars more susceptible to damage, injury, or theft, and offer lower rates for those that are considered safer.
According to the Insurance Institute for Highway Safety (IIHS), some of the top safety picks among 2013 models include:
- Dodge Dart, Ford Focus 4-door, and Hyundai Elantra sedan (small cars)
- Ford Fusion, Honda Accord, and Kia Optima (mid-size moderately priced cars)
- Acura TL, Lincoln MKZ, and Volvo S60 (mid-size luxury cars)
- Buick LaCrosse, Chrysler 300, and Toyota Avalon (large family cars)
- Cadillac XTS, Lexus GS, and Audi A6 (large luxury cars)
- Mitsubishi Outlander Sport and Subaru Forester (small SUVs)
- Chevrolet Equinox, GMC Terrain, and Jeep Grand Cherokee (mid-size SUVs)
Despite the fact that all states either require car insurance or proof of financial responsibility to operate a vehicle on the roadway, nearly one in every six drivers is uninsured. When these uninsured drivers cause accidents, the companies who insure the victims have to eat the costs through uninsured and underinsured motorist coverage, and these insurers then pass the costs onto their customers in the form of higher premiums.
Fraudulent car accidents cost honest policyholders and auto insurers billions of dollars annually and also create unsafe conditions on roads and highways, sometimes resulting in serious injuries and fatalities. These staged accidents are especially common in states that have no-fault auto insurance, a program that allows policyholders to recover financial losses from their own insurance company, regardless of fault. Twelve U.S. states have no-fault auto insurance laws, and Florida leads the list of no-fault states with questionable claims involving staged accidents. Colorado repealed its no-fault insurance law in 2003.
Is There Relief in Sight?
Some insurance companies are now offering pay-as-you-drive auto insurance that is designed to give drivers a financial incentive to drive less and more carefully when they do. The idea behind these programs is simple: The more positively drivers react to the incentive the less they will pay for their insurance.
Some insurers are also offering more complex programs that involve installing a telematics device in the car that is designed to relay information about driving habits, such as when and how the car is being driven.
Historically, drivers do not associate price to the way they drive, unless the cost increase is significant. The hope is that the immediate feedback provided by pay-as-you-drive plans will be more effective in encouraging drivers to trade in their bad driving habits for lower car insurance premiums.
Image by Andrew Steinmetz.